Home Prices: Stabilizing, or Just Plain Flat?

Non-Distressed Home Prices Are Stable

Speaking of various metrics for measuring home prices, some analysts offered a very different and quite cheery picture of the current state of the housing market this week. Stephen Kim of Barclays Capital is optimistic about stabilizing home prices for non-distressed properties. If you remove distressed listings from the equation, “home sales have stabilized for almost a year.”

Kim continues, "In our opinion, this is the most important trend in the housing industry right now, and we are amazed at how little attention it has been getting from the media and the Street." The stabilization of the non-distressed market could mean that a price bottom is coming soon, and with that, eventual recovery.

Distressed Properties Defined

Wait a second—what exactly is a “distressed” property again? In general, it’s a listing that is being sold way under its market value due to impending or current foreclosure. Three common types of distressed properties are short sales, foreclosures, and REOs.

· Short sales, which we did a series on in September, are homes that are still owned by the seller, but are being sold quickly. Often the seller has experienced financial hardship and is delinquent on their mortgage, or the home may have already gone into the foreclosure process. In any case, the bank allows the home to be sold for “short” of what the seller owes.

· Foreclosure, which we discussed last week, is a process of a property being seized and resold. After an owner misses a handful of mortgage payments, they are issued a Notice of Default on their home loan. The homeowner has time to make up the amount until a foreclosure auction takes place.

In the wake of an economic recession, we all know that distressed listings plague the housing market. Even as they may provide an opportunity for first-time buyers or investors, their abysmal prices weigh the whole market down.

In markets like Las Vegas or Detroit, REOs make up nearly half of all listings! It’s no surprise that excluding them from the market picture would dramatically change the results. But Stephen Kim believes that the gap between distressed and non-distressed listings is widening because “a distressed home is increasingly being seen as a poor substitute for a non-distressed home.”

That means less people are looking at distressed listings as a steal and turning instead to non-distressed properties at low, but stabilizing prices. And in turn, buyer confidence rises (and hopefully home values follow suit).

For Some, Stable is Just Another Way of Saying Flat

No one can deny that non-distressed home prices seem to be stabilizing according to the data, but is that really good news? Clear Capital’s report has flatness written all over it:

· Quarter-over-quarter performance is flat at a 0.3% increase.

· Nationally, performance is uniform, with only 2% separating the best and worst regions.

· Although this November’s price change (-2.2%) is better than last year’s (-2.8%), this is the fourteenth consecutive month of year-over-year declines.

The problem is that while sales are improving slightly, and consumer sentiment may be settling a bit, the mess left to clean up from the past is still weighing heavily on the future. The economy may be improving slightly, buyers may be considering getting back in, but we are barely half way through the overhang of distress, and any change in the economy could set us back even further… While there may be two types of properties (distressed and non-distressed), there is just one housing market, and you cannot negate one to inflate or deflate the other.